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What Is Wrongful Trading & How It Affects Company Directors?

View profile for Michael Stevens
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As you are no doubt aware, the recent economic recession put an enormous strain on small to medium enterprises all over the UK. Unfortunately, many companies were not able to survive but, through excellent business management and hard work, a lot of them did. This means there are now a number of companies around the country experienced in clawing their way out of difficult times. This is certainly a good thing.

However, many directors who have tried and failed to save their company from serious financial difficulty could be personally liable  by virtue of section 214 of the Insolvency Act 1986.

This section deals with “wrongful trading” and provides that, if a company goes into insolvent liquidation and the director knew, or ought to have known, that there was no reasonable prospect that the company would avoid insolvent liquidation, the director may be pursued and made to make a contribution to the company’s assets. This to try and prevent “doomed” companies from continuing to trade and creating a bigger and bigger loss for their creditors.

However, this is not to say that every director should give up whenever times get tough. Section  214 provides a defence to wrongful trading - that the director took every step with a view to minimising a potential loss to the company’s creditors. This will be judged on the individual facts but a number of usual points include:

  • Minimising goods taken on credit
  • Utilising management accounts
  • Producing cash-flow projections
  • Making necessary redundancies

One of the key factors is taking professional advice, both accountancy and legal. This would therefore allow a director to show they are making serious efforts to save the company and allow them to make use of the experience and expertise of professional advisers such as those here at Tilly Bailey & Irvine

your business matters

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